Leasing a Car? Know the Downsides

by Lee Distad

For many people, car ownership is the second biggest ticket purchase that they’re likely to make (after real estate). No matter how you slice it, a car is a substantial purchase.

My late grandfather was fond of pointing out that every vehicle he purchased in his lifetime cost as much as all the previous ones put together. As a child of the Great Depression Era, he was incredibly debt-averse, and paid cash for all of them.

However, because a car represents such a sizable purchase, most people choose to finance them rather than pay cash.

For personal vehicles (as opposed to ones for work), buying has a number of advantages over leasing. Here are some of the disadvantages inherent in leasing a vehicle for personal use.

You’ll Never Stop Making Payments

Unlike paying off a car loan, where one day you’ll make your last payment and the car will be your property, leasing is just like paying rent.

When you finally return a leased car, your relationship with it is over. All you’ve received for your money is its time and use.

Some leases are open-ended with a buyback option, but I’m not keen on them. By the time your lease ends, you’ve already paid a substantial amount without earning any equity. The buyback balloon cost at the end is often uneconomical.

I haven’t even mentioned that vehicles depreciate over time. But once it’s paid for, it’s a possession that still has some value attached to it.

Extra Charges For Mileage And Wear

With most closed-ended leases, you face extra costs for higher mileage and greater-than-normal wear and tear.

For grocery-getters and pleasure-driving vehicles, that may not be an issue, but for a daily driver, in the long run you may well be better off with a loan instead of a lease.

With No Equity, You’re Out Of Luck if it’s Totaled

My primary beef with car leases stems from personal experience. If you’re in an accident that totals your vehicle, the insurance company pays off the bank, not you.

We once chose to lease a vehicle that was t-boned and totaled in an accident (thankfully there were no serious injuries). But we needed a new car, and the insurance claim left us with no vehicle to trade in or lump sum of cash to make a down payment.

At that time, we lacked the resources to pony up a large down payment on our own. So, without a trade-in and no down payment, the monthly payment on our replacement vehicle was substantially higher than we would have preferred.

Hardly a life-or-death situation, but it was a drag nonetheless.

Too often, people make financial plans based on best-case scenarios. Well, in order to plan and budget effectively, you need to face the worst-case scenarios also. Ask yourself, “If I lease a vehicle, and it has to be written off, will it be a material hardship to acquire a new one?”

If the answer is yes, consider a traditional car loan instead.

As they say, your mileage may vary. Make informed financial decisions after weighing your options and looking at both the pros and the cons. And if you’re buying, be sure to take advantage of a trade-in allowance (like cash for clunkers), make a substantial down-payment, or both.

Lee Distad consults with CE integration firms on design, installation and project management processes and Best Practices, and offers provides professional copy writing services for websites, brochures, and marketing initiatives. His freelance work covers topics from CE to global business to finance in both print and online.

Previous post:

Next post: